Introduction To Corporate Finance Edited by DBH Jan 06

1. Introduction To Corporate Finance Edited by DBH Jan 06

2. Chapter Outline • Corporate Finance and the Financial Manager • Forms of Business Organization • The Goal of Financial Management • The Agency Problem and Control of the Corporation • Financial Markets and the Corporation

3. Corporate Finance • Some important questions that are answered using finance • What long-term investments should the firm take on? • Where will we get the long-term financing to pay for the investment? • How will we manage the everyday financial activities of the firm?

4. Financial Manager • Financial managers try to answer some or all of these questions • The top financial manager within a firm is usually the Chief Financial Officer (CFO) • Treasurer – oversees cash management, credit management, capital expenditures and financial planning • Controller – oversees taxes, cost accounting, financial accounting and data processing

5. Financial Management Decisions • Capital budgeting • What long-term investments or projects should the business take on? • Capital structure • How should we pay for our assets? • Should we use debt or equity? • Working capital management • How do we manage the day-to-day finances of the firm?

6. Forms of Business Organization • Three major forms in the United States • Sole proprietorship • Partnership • General • Limited • Corporation • S-Corp • Limited liability company

7. Advantages Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income Disadvantages Limited to life of owner Equity capital limited to owner’s personal wealth Unlimited liability Difficult to sell ownership interest Sole Proprietorship

8. Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Disadvantages Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership Partnership

9. Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate) Corporation

10. Goal Of Financial Management • What should be the goal of a corporation? • Maximize profit? • Minimize costs? • Maximize market share? • Maximize the current value of the company’s stock? • Does this mean we should do anything and everything to maximize owner wealth?

11. Why Shareholder Value?Roberto Goizueta, Chairman, Coca-Cola Company, 1997 • Increasing share-owner value is the job our economic system demands of us • Shareholders put us in business • Business distributes the lifeblood of our economic system--goods and services but also taxes, salaries, philanthropy

12. Why Shareholder Value? (2) • If we do our jobs, we can contribute to society in very meaningful ways • Companies are expected to do good deeds, but also good work--work focused on our mission to create value over time for owners • Those owners include not only individual investors, but university endowments, philanthropic foundations, other non-profit organizations. The more value created for them, the more goodthey can do

13. Why Shareholder Value? (3) • Focusing on creating value over the long term keeps us from acting shortsighted • The long haul means being of value to consumers, customers, bottling partners, all other stakeholders • Real conflict is not between shareholders and stakeholders, but between the long-term and short-term interests of both • Coca-Cola has grown over 110 years because of discipline to its mission (value over the long haul for its owners)

14. Why Shareholder Value? (4) • “A billion hours ago, human life appeared on Earth. A billion minutes ago, Christianity emerged. A billion seconds ago, the Beatles changed music forever. A billion Coca-Colas ago was yesterday morning.” -Roberto Goizueta

15. Why Shareholder Value? (5-end) • “What must we do to make a billion Coca-Colas ago be this morning? By asking this question, we discipline ourselves to the long term view...the best way to serve all our stakeholders...is by creating value over time for those who have hired us.”

16. The Agency Problem • Agency relationship • Principal hires an agent to represent his/her interest • Stockholders (principals) hire managers (agents) to run the company • Agency problem • Conflict of interest between principal and agent • Management goals and agency costs

17. Managing Managers • Managerial compensation • Incentives can be used to align management and stockholder interests • The incentives need to be structured carefully to make sure that they achieve their goal • Corporate control • The threat of a takeover may result in better management • Other stakeholders

18. Work the Web Example • The Internet provides a wealth of information about individual companies • One excellent site is finance.yahoo.com • Click on the web surfer to go to the site, choose a company and see what information you can find!

19. Financial Markets • Cash flows to the firm • Primary vs. secondary markets • Dealer vs. auction markets • Listed vs. over-the-counter securities • NYSE • NASDAQ

20. End of Chapter